Companies paying regular dividends offer the following fundamental strengths:
- Dividends return cash to shareholders and create confidence in economic success – "cash is king"
- Earnings after dividends tend to be used more efficiently
- A consistent dividend policy sends a strong message about continuity and reliability
- Dividends are rarely cut (unlike earnings) and therefore cushion the downside
A source of significant return for equities
One of the most notable statistics about dividends is the impact they have on the returns of equities over the long-term.
The reinvestment of dividends has accounted for 44.7 per cent of the total returns of the S&P 500 index since 1926. Over this same time period, the price appreciation of the S&P 500 had an annualised return of 5.35 per cent, whereas the total return of the index when dividends were reinvested was an annualised 9.67 per cent.
When considering how to implement a dividend strategy, it is important to consider the vast opportunity set available via international stock markets. All regional stock markets outside of North America tend to offer higher yields.
Dividend stocks and the emerging markets
Sustainable dividends can help stabilise investment returns over the long-term. For this reason, dividend strategies in emerging markets are becoming attractive. Although emerging markets can themselves be very volatile, they can also be rewarding in terms of their dividend strategies.
Provide good insight
Dividends provide important insight into a company´s health, balance sheet, cash-flow generating capability, performance and growth prospects. They bring discipline to the decision-making process and provide a reasonable and conservative valuation metric for equity markets.
However, any analysis based on dividends should additionally recognise that attitudes towards them vary between markets, and companies in some regions – such as the US – place little emphasis on dividends, either because they can´t pay them or because they believe investors will be better served through cash flow being re-invested into the business.
In short, investing in dividend-paying securities provides exposure to more established and stable companies, while mitigating some of the wider market swings. These positive factors mean we expect them to play a larger role in driving total returns in global equity markets over the coming years.
Dr Oliver Plein is head of product specialists, equities, at DWS Investments. The views expressed here are his own.